Investment Policies — a great tool

November 10, 2017

Policies may seem like a dry topic to some, so if you believe this to be dry, pour yourself a good single malt and read on!

Investment policies go hand-in-hand with Gift acceptance policies. Both are needed for any mature organization to thrive. You certainly don’t want to be creating the policies as you go — it will come back to haunt you.

Let’s look at the investment policies. These are a useful tool (and one that must be looked at periodically to ensure that it is still relevant). In Canada, there is a “prudent investor” test.

The prudent investor test is a guideline that requires a fiduciary to invest trust assets as if they were his own. … The prudent investor rule states that the decision-making process must follow certain guidelines, even if the final result does not satisfy the original intent.

Furthermore, the Trustee Act (again, in Canada), sets out a list of seven criteria a trustee must consider when making investments. These seven are in addition to any others that are relevant to the circumstances of the charity. These are (taken from the Ontario Attorney General website):

  1. general economic conditions;
  2. the possible effects of inflation or deflation;
  3. the expected tax consequences of the investment decisions or strategies;
  4. the role each investment or course of action plays within the charity’s overall portfolio;
  5. the expected total return from income and growth of capital;
  6. needs of the charity for liquidity, regularity of income and preservation or appreciation of capital. The need to produce sufficient income to allow the charity to carry out its purposes must be balanced against the need to maintain and, if possible, increase the capital for the future; and
  7. an asset’s special relationship or special value, if any, to the purposes of the charity or to its beneficiaries.

The investment policies are much more complicated than simply parking funds into a GIC. As a matter of fact, parking all of your funds in a GIC is both contrary to the Trustee Act, as well as the Prudent Investor test. A balanced portfolio is the way to go.

That being said, there may be some additional considerations. Perhaps you are a cancer charity. If so, you may not want to invest in tobacco companies. Or perhaps your organization does a lot of work in the developing countries, so you may want a larger emphasis on the emerging markets in your portfolio. All to say that what you invest in specifically is of less importance than having a policy of the type of things you invest in.

Policies usually have target ranges (i.e. Fixed assets may range from a minimum of 20% of the asset pool up to a maximum of 40% of the pool, with a target of 30%). This is why it is important for the policy to be reviewed on a regular basis — perhaps market conditions have changed and the targets for the different asset types need to be re-jigged.

Most larger institutions use financial advisors to manage their funds and many have custodians that oversee these advisors. Advisors need to be reviewed on a regular basis (a first quartile money manager will likely only have one direction to go — down — over time, and a fourth quartile manager will likely have only one way to go — up). Likewise, many larger organizations have a well-heeled investment committee. These are folks that understand the investment world (but are not actively investing any of the organization’s money, otherwise it would be a conflict of interest).

I was lucky enough to attend a conference of community foundations in a former life. It took place in the States and was at a pretty sophisticated level. We heard from money managers from all of the big American investment firms. Then we had the privilege of hearing from the Chair of the Investment Committee at Harvard. They were seeing returns over 20%. I was blown away — how could that be? Then they shared the makeup of their Investment Committee — it was made up of the best and brightest on Wall Street (all Harvard alumni). By grouping these great minds together under one cause, they were able to post some pretty amazing results!

If your organization doesn’t yet have proper Investment Policies, create them now!!! This way, your donors (and the public) have the confidence that you are being good stewards of their investments.